Crown Castle International Corp. — FY2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019, with fourth-quarter information included. Crown Castle owns, operates and leases shared U.S. communications infrastructure, including approximately 40,000 towers and 80,000 route miles of fiber supporting small cells and fiber solutions. Its operating segments are Towers and Fiber. The company operates as a real estate investment trust.
Site rental revenues are predominantly recurring and generated under long-term tenant contracts. T-Mobile, AT&T, Verizon Wireless and Sprint together represented approximately 75% of 2019 site rental revenue. The weighted-average remaining contract term was approximately five years, excluding tenant renewal options, with approximately $24.4 billion of contracted tenant payments.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenues | $5.763 billion | $5.370 billion | +7% |
| Site rental revenue | $5.093 billion | $4.796 billion | +6% |
| Services and other revenue | $670 million | $574 million | +17% |
| Operating income | $1.559 billion | $1.383 billion | +13% |
| Net income attributable to CCIC stockholders | $860 million | $622 million | +38% |
| Net income attributable to common stockholders | $747 million | $509 million | +47% |
| Diluted EPS | $1.79 | $1.23 | +$0.56 |
| Adjusted EBITDA | $3.299 billion | $3.091 billion | +7% |
| Net cash from operating activities | $2.698 billion | $2.500 billion | +8% |
Approximate 2019 margins were 27.1% operating, 14.9% net income and 57.2% Adjusted EBITDA. Site rental gross margin was approximately $3.670 billion, or 72.1% of site rental revenue. Towers site rental revenue increased 6% to $3.389 billion, while Fiber site rental revenue increased 7% to $1.704 billion.
Capital expenditures were $2.057 billion, including $1.9 billion of discretionary capital expenditures primarily directed toward small-cell and fiber construction. Sustaining capital expenditures were approximately 2% of net revenues. Investing cash outflows were $2.081 billion, and financing cash outflows were $692 million. Common stock dividends paid totaled approximately $1.9 billion; declared dividends per common share increased to $4.58 from $4.28.
Debt, liquidity and balance sheet
- Total debt and other obligations were $18.121 billion at December 31, 2019, compared with $16.682 billion at December 31, 2018.
- Cash and cash equivalents were $196 million; cash, cash equivalents and restricted cash totaled $338 million.
- Undrawn availability under the $5.0 billion revolving credit facility was approximately $4.5 billion.
- Debt had a weighted-average interest rate of approximately 3.8%, weighted-average maturity of approximately six years, and 83% carried fixed-rate coupons.
- The company reported a 5.4x total net leverage ratio versus a 6.50x covenant limit and stated that it was in compliance with its debt covenants.
- Contractual obligations totaled $36.617 billion, including $18.235 billion of scheduled debt maturities, $9.099 billion of debt interest, and $8.980 billion of lease obligations. These amounts exclude approximately $1.0 billion of undiscounted asset-retirement obligations.
Material changes versus the prior comparable period
- Net revenues increased $393 million, driven by tenant additions, contractual escalators, network investment and increased demand for small cells and fiber solutions.
- Operating income increased $176 million, supported by revenue growth and relatively fixed tower operating costs.
- Common-stockholder net income increased $238 million, partly because 2018 included $106 million of losses on retirement of long-term obligations, compared with $2 million in 2019.
- Interest expense increased 6% to $683 million as debt increased to finance capital expenditures.
- Capital expenditures increased to $2.057 billion from $1.739 billion, primarily reflecting construction of small cells and fiber.
- The company adopted the new lease accounting standard in 2019, recognizing operating lease right-of-use assets of $6.133 billion and operating lease liabilities of $5.810 billion. Management stated that adoption materially affected the balance sheet but did not materially affect the income statement or cash flows.
- Fourth-quarter 2019 net revenues were $1.426 billion versus $1.406 billion in fourth-quarter 2018; diluted common EPS was $0.43 versus $0.42.
Restatement, outlook, risks and unusual items
The company restated 2017 and 2018 financial statements and interim 2019 information after determining that it had improperly recognized the full transaction price for certain tower installation services as service revenue upon installation. Amounts related to permanent tower improvements represent a lease component and must be recognized as site rental revenue over the associated lease term. The restatement reduced 2018 net income by approximately $48 million and 2017 net income by approximately $59 million; the cumulative reduction in net income through September 30, 2019 was approximately $516 million. The restatement did not affect business operations or net cash flows.
Management and the independent auditor identified a material weakness in internal control over financial reporting related to tower installation services, including failure to identify lease components and verify related capital expenditures. Disclosure controls and procedures were also ineffective as of December 31, 2019. Management initiated remediation involving revised accounting policies, improved controls and employee training.
For 2020, management expected site rental revenue growth to benefit from higher tenant additions and expected discretionary capital expenditures to remain relatively consistent with 2019. Sustaining capital expenditures were expected to remain approximately 2% of net revenues. The company expected common dividends over the following 12 months to total at least $4.80 per share, or approximately $2.0 billion.
- Tenant concentration and the proposed T-Mobile-Sprint combination could reduce or delay network investment, cause overlapping network decommissions, and pressure revenues and cash flows. T-Mobile and Sprint represented approximately 21% and 14%, respectively, of consolidated site rental revenues in 2019.
- The company faces substantial leverage, refinancing, interest-rate and LIBOR-transition risks. It also expects to refinance certain Tower Revenue Notes on or before their anticipated repayment dates.
- The SEC is investigating historical capitalization and expense policies for tenant upgrades and installations. The company also faces putative securities class actions related to disclosures and cannot predict the outcome or potential losses.
- Other risks include competition, technology substitution, construction delays and cost overruns, loss of land or rights-of-way, regulatory requirements, cybersecurity incidents, environmental liabilities and failure to maintain REIT qualification.
- The 6.875% mandatory convertible preferred stock was scheduled to automatically convert into common stock on August 1, 2020, subject to its conversion terms.
Most important facts for investors to verify
- Use the restated 2017, 2018 and interim 2019 figures rather than previously filed amounts.
- Assess the remediation and independent-auditor follow-up concerning the material weakness.
- Monitor T-Mobile-Sprint integration, tenant non-renewals and the concentration of revenue among four major wireless carriers.
- Evaluate the company’s ability to fund approximately $2.0 billion of expected common dividends, capital expenditures and debt obligations while maintaining leverage targets.
- Review upcoming debt maturities, Tower Revenue Note refinancing assumptions, revolving-credit availability and commercial paper exposure.
- Track the SEC investigation and shareholder litigation, for which the filing does not provide a clear estimate of potential losses.